9 ms·

The brazenness of the LIBOR scam

211 points by fern12 9y ago

ggm 9y ago
The book might show how big FinTech houses were behind this but the article is light in that regard. The moments where people feel they can ask inside their own bank 'can guy move the LIBOR just a few thou' and not realise that's an otfense, breaks Chinese walls, breaks bounds.. and then institutionalization sets in...and you're off and running. Those moments felt to me like 'its not a conspiracy, it's Lowe grade decision making by people who aren't reminded of their obligations' so maybe the book tells it better. Always a bit of a sad moment, when the journo realised they like their subject. How do you maintain objectivity once you humanize the devil? Gitta Serenyi had that with Albert Speer.
ikeboy 9y ago
>To me, that’s a really unhealthy sign, because the thing that would scare some of these bank CEOs is not losing some money or losing their jobs; it’s the prospect of being perp-walked in front of TV cameras in handcuffs, or the prospect of possibly losing your liberty in front of a jury of your peers. That is a terrifying thing. To me, the great missed opportunity of the financial crisis was that prosecutors didn’t do that a single time with a CEO or a top executive of any major financial institution. They might have lost those cases, but at least it would have struck some fear in the hearts of people. That’s just a tremendous missed opportunity, in my opinion. Ah yes, I love when my government hassles innocent people to make a point to everyone else.
- Lazare 9y ago
  Yes, that paragraph felt quite horrifying to me. Does the whole "rule of law" thing mean nothing to the author?
  - croon 9y ago
    The "rule of law" isn't about committing a crime, it's whether or not you are prosecuted and potentially sentenced for it.
    - ikeboy 9y ago
      And this quote is specifically advocating for actions meant to embarrass bank CEOs, nothing to do with crime.
      - Angostura 9y ago
        It was meant to punish bank CEOs specifically in charge of the operations that committed the crime.
        JumpCrisscross 9y ago
        > bank CEOs specifically in charge of the operations that committed the crime The article advocates prosecutors charging bankers even though they “might have lost those cases, but at least it would have struck some fear in the hearts of people.” If you lose the case, there was no crime. Charging people with unwinnable cases is bad.
        Angostura 9y ago
        They "might have" is the critical phrase. Not they "would have" the author is arguing that the prosecutors were overly cautious, not that they should handcuff random CEOs
        JumpCrisscross 9y ago
        > author is arguing that the prosecutors were overly cautious, not that they should handcuff random CEOs OP is saying Enrich (the guy being interviewed) went too far when saying about cases that would be lost: “but at least it would have struck some fear in the hearts of people.” I agree with the point about prosecutorial conservatism. But part of the conservatism is a product of proper restraint. Drug crime prosecutors show the opposite end of the spectrum; our criminal justice system aspires to a default of innocence for a reason.
        9y ago
- 21 9y ago
  > Ah yes, I love when my government hassles innocent people to make a point to everyone else. I also love it when some people are just "Too Big To Jail (TM)" > Those investigations uncovered substantial evidence "that senior bank officials were complicit in the illegal activity." > On Tuesday, not only did the US Justice Department announce that HSBC would not be criminally prosecuted, but outright claimed that the reason is that they are too important, too instrumental to subject them to such disruptions. In other words, shielding them from the system of criminal sanction to which the rest of us are subject is not for their good, but for our common good. > The New York Times Editors this morning announced: "It is a dark day for the rule of law." There is, said the NYT editors, "no doubt that the wrongdoing at HSBC was serious and pervasive." But the bank is simply too big, too powerful, too important to prosecute. https://www.theguardian.com/commentisfree/2012/dec/12/hsbc-prosecution-fine-money-laundering https://www.theguardian.com/commentisfree/2012/dec/12/hsbc-p...
  - Iv 9y ago
    I am still angry that banks too big to fail were not nationalized at this time.
    - croon 9y ago
      Bingo. You've as a country determined that an institution is too important to your population and your country's stability to have it go bankrupt. But instead of growing your economy through it, you through actions deem it okay to siphon money to the private owners instead of the people paying for it through taxes.
    - PhantomGremlin 9y ago
      They sort-of were nationalized. But it was done somewhat subtly. The existing common equity (and IIRC preferred stock) in a number of entities was massively diluted by issuing new preferred stock and warrants to the US government. Here are two examples, they were among the worst offenders. Look at the share price for Citigroup and AIG: https://finance.yahoo.com/quote/C?p=C https://finance.yahoo.com/quote/C?p=C https://finance.yahoo.com/quote/aig/?p=aig https://finance.yahoo.com/quote/aig/?p=aig If you owned pre-crisis C common stock, you're still down about 84%. If you owned pre-crisis AIG common, you're still down about 95%. (that's approximate, done by eyeballing the charts). Edit: Yahoo Finance charts have been getting worse and worse, you need to click "Max" to see the proper timeline. I don't follow UK equities closely, but I think the same thing happened to a number of UK banks at the time. E.g. RBS. Unfortunately the whole thing was quite uneven. E.g. Goldman Sachs took advantage of the morons at AIG who sold them very cheap "insurance" such as credit default swaps. But Goldman was made whole. What should have happened is that Goldman should have been made to share the pain. Edit: I'm of course talking about the '08 financial crisis in general. I don't agree that the Libor scandal was significant enough to nationalize the banks as punishment. I'd much rather see a few bad actors taken out back and shot. That would be much more salutary in terms of deferring future bad behavior.
- Angostura 9y ago
  I think the implication is that they aren't innocent, but bear responsibility for the activity; either directly, por by setting the culture and governance arrangements.
freech 9y ago
> first, you identify inefficiencies in the market: weaknesses, loopholes, things like that Huh? That's not what inefficiency means. It means that an asset costs more (or less) then it's worth.
cm2187 9y ago
The article is light on the description of what actually happened but there is a section about the impact of his action and whether he relised the impact. One thing to understand is that there was not one but two distinct manipulations of Libor. The first is the one this article refers to, which is before the financial crisis, swap traders influencing the libor submitters to move their contribution to the fixing by a tiny amount, often a couple of basis points, to fit the massive future positions they were sitting on. Completely unethical and illegal but unlikely to have any noticable effect on the market, kind of like stealing a penny from a million bank accounts. It’s still stealing, but the impact on the market is limited. The second manipulation was of a different nature. It is at the height of the financial crisis, when banks were failing as a result of bank runs every week, libor submitters, probably under instruction / tacit consent from their management and regulators, low balled their contribution to the libor fixing to not appear to be struggling to fund themselves (by having a high cost of borrowing) since these contributions were public and investors were trying to infer what bank was next to fail. These low balling were probably in the 50-300 basis point range, ie with a material impact on the wider maket (borrowers should have paid significantly higher interest rates during that period). And this is the one whistle blowers complained to regulators about, falling into deaf ears.
- osullivj 9y ago
  The article is wrong in a couple of substantial matters. Firstly: "as far as I can tell, he is the only banker currently in jail for crimes committed during the financial crisis." Wrong - the Barclays Swap traders are doing time. @teamJayMerchant is in HMP Wandsworth. Secondly: "the ultimate people who drive behavior at banks are actually the shareholders." I own some banking shares and I wish I didn't. Long experience of working in the banking sector has convinced me that banks are run for the benefit of the senior management. Shareholders, like customers, are just convenient chumps to be gouged at every turn.
  - viraptor 9y ago
    > I own some banking shares and I wish I didn't. I'm really curious what you mean by that. Is it just that they bring good money, or why don't you get rid of them?
LittlePeter 9y ago
What is surprising to me is that LIBOR setting was not based on actual transactions but on the assumptions what I would pay bank X to borrow money. The perceived punishment for lying was laughable too. All around this just invites actors with bad incentives. I believe as of today LIBOR is set based on actual transactions. But who was the genius who created the original LIBOR? Perhaps it all started as something hacky in the 60s and they could not foresee how important LIBOR would become?
- nmstoker 9y ago
  It started in the mid 80s according to Wikipedia. I don't doubt what they did was immoral, but most of the articles I've seen skip over the murky aspect of what exactly was illegal. Thinking of an absurd parallel, if you had a dinner club and had to say how much you were going to pay before the restaurant was picked, it's hard to see how manipulating your decision to influence the restaurant chosen would be illegal if there wasn't some firm agreement in the process being deterministic or formally defined. And that wouldn't change even if others were making money on the back of the restaurant choice! What I'd like to see explained is how LIBOR went from an ill-defined process to one where the way some participants set it was no longer legal. What had the participant banks signed up to do /not do which they then failed to do? Or is the illegality all on the part of those trading on it? (ie insider trading, given that it was based on non-public information)
dbuder 9y ago
If you ask a bunch of traders to give you a fake number and then cry that it's a fake number I have no sympathy.
truculation 9y ago
My bank was involved with the LIBOR scandal but they won't let my wife pay small amounts of cash into my account just in case we're up to something dodgy. If I temporarily have a large amount of cash in the account then they send me brochures trying to lure me into some premium 'exclusive' club which feels more than slightly greasy. I would switch banks but it's a lot of hassle. Plus I don't get the sense that any of them would be working for me. They're working for the regulator, or for the forces of darkness, or for someone else.
- weavie 9y ago
  If you are in the Uk, switching accounts is a lot easier than it used to be. https://www.currentaccountswitch.co.uk/howtoswitch/Pages/How.aspx https://www.currentaccountswitch.co.uk/howtoswitch/Pages/How...
- pjmorris 9y ago
  Early in 2008, on principle, we switched from a 'Too Big To Fail' bank to a credit union. It was a pain, and is occasionally inconvenient, but that pain is outweighed by the satisfaction in reading the headlines and being glad I'm not funding them anymore.
kbart 9y ago
"The mastermind of the LIBOR scandal was a guy named Tom Hayes, a mildly autistic mathematician" How convenient is to have such people around /s. Developers should learn from stories like this as well -- don't do anything illegal, even though your superiors tell you so, because when shit hits the fan, you will be the one held accountable.
- AndyMcConachie 9y ago
  It's unfortunately a much more convenient narrative than blaming the people that actually benefitted the most (i.e., bank CEOs). "This is part of the reason I love Hayes as a central character for this book — because he’s not your cookie-cutter banker out of central casting. This is a guy who is much happier going home after a day of work and having a bucket of fried chicken and an orange juice and watching Seinfeld reruns than he is going out to Michelin-starred restaurants or a swanky club. To me, his massive social awkwardness — the fact that he would go to a dinner party, and sit next to a stranger, and start talking to her very loudly about his dandruff problem — he had no idea how to behave in normal society." Political and cultural ostracism has real world consequences. They've found their scapegoat and they're piling on. It's pretty disgusting actually.
  - kbart 9y ago
    I partly blame media for that as well, because they tend to portray movie-like evil minded geniuses that are probably more appealing and easier to grasp for general reader than methodical, faceless, industrious scams and legal gray areas. This can be seen even more so in politics.
    - jjoonathan 9y ago
      Captain America punches Campaign Finance in the face, freeing the American people from the grip of expanding monopolies and anti-consumer practices!
    - rhizome 9y ago
      The media ain't what caps on RMS in every HN thread in which he is mentioned.

211 points by fern12 9y ago

ggm 9y ago

The book might show how big FinTech houses were behind this but the article is light in that regard. The moments where people feel they can ask inside their own bank 'can guy move the LIBOR just a few thou' and not realise that's an otfense, breaks Chinese walls, breaks bounds.. and then institutionalization sets in...and you're off and running. Those moments felt to me like 'its not a conspiracy, it's Lowe grade decision making by people who aren't reminded of their obligations' so maybe the book tells it better. Always a bit of a sad moment, when the journo realised they like their subject. How do you maintain objectivity once you humanize the devil? Gitta Serenyi had that with Albert Speer.

ikeboy 9y ago

>To me, that’s a really unhealthy sign, because the thing that would scare some of these bank CEOs is not losing some money or losing their jobs; it’s the prospect of being perp-walked in front of TV cameras in handcuffs, or the prospect of possibly losing your liberty in front of a jury of your peers. That is a terrifying thing. To me, the great missed opportunity of the financial crisis was that prosecutors didn’t do that a single time with a CEO or a top executive of any major financial institution. They might have lost those cases, but at least it would have struck some fear in the hearts of people. That’s just a tremendous missed opportunity, in my opinion. Ah yes, I love when my government hassles innocent people to make a point to everyone else.

Lazare 9y ago
Yes, that paragraph felt quite horrifying to me. Does the whole "rule of law" thing mean nothing to the author?
- croon 9y ago
  The "rule of law" isn't about committing a crime, it's whether or not you are prosecuted and potentially sentenced for it.
  - ikeboy 9y ago
    And this quote is specifically advocating for actions meant to embarrass bank CEOs, nothing to do with crime.
    - Angostura 9y ago
      It was meant to punish bank CEOs specifically in charge of the operations that committed the crime.
      - JumpCrisscross 9y ago
        > bank CEOs specifically in charge of the operations that committed the crime The article advocates prosecutors charging bankers even though they “might have lost those cases, but at least it would have struck some fear in the hearts of people.” If you lose the case, there was no crime. Charging people with unwinnable cases is bad.
        Angostura 9y ago
        They "might have" is the critical phrase. Not they "would have" the author is arguing that the prosecutors were overly cautious, not that they should handcuff random CEOs
        JumpCrisscross 9y ago
        > author is arguing that the prosecutors were overly cautious, not that they should handcuff random CEOs OP is saying Enrich (the guy being interviewed) went too far when saying about cases that would be lost: “but at least it would have struck some fear in the hearts of people.” I agree with the point about prosecutorial conservatism. But part of the conservatism is a product of proper restraint. Drug crime prosecutors show the opposite end of the spectrum; our criminal justice system aspires to a default of innocence for a reason.
        9y ago
21 9y ago
> Ah yes, I love when my government hassles innocent people to make a point to everyone else. I also love it when some people are just "Too Big To Jail (TM)" > Those investigations uncovered substantial evidence "that senior bank officials were complicit in the illegal activity." > On Tuesday, not only did the US Justice Department announce that HSBC would not be criminally prosecuted, but outright claimed that the reason is that they are too important, too instrumental to subject them to such disruptions. In other words, shielding them from the system of criminal sanction to which the rest of us are subject is not for their good, but for our common good. > The New York Times Editors this morning announced: "It is a dark day for the rule of law." There is, said the NYT editors, "no doubt that the wrongdoing at HSBC was serious and pervasive." But the bank is simply too big, too powerful, too important to prosecute. https://www.theguardian.com/commentisfree/2012/dec/12/hsbc-prosecution-fine-money-laundering https://www.theguardian.com/commentisfree/2012/dec/12/hsbc-p...
- Iv 9y ago
  I am still angry that banks too big to fail were not nationalized at this time.
  - croon 9y ago
    Bingo. You've as a country determined that an institution is too important to your population and your country's stability to have it go bankrupt. But instead of growing your economy through it, you through actions deem it okay to siphon money to the private owners instead of the people paying for it through taxes.
  - PhantomGremlin 9y ago
    They sort-of were nationalized. But it was done somewhat subtly. The existing common equity (and IIRC preferred stock) in a number of entities was massively diluted by issuing new preferred stock and warrants to the US government. Here are two examples, they were among the worst offenders. Look at the share price for Citigroup and AIG: https://finance.yahoo.com/quote/C?p=C https://finance.yahoo.com/quote/C?p=C https://finance.yahoo.com/quote/aig/?p=aig https://finance.yahoo.com/quote/aig/?p=aig If you owned pre-crisis C common stock, you're still down about 84%. If you owned pre-crisis AIG common, you're still down about 95%. (that's approximate, done by eyeballing the charts). Edit: Yahoo Finance charts have been getting worse and worse, you need to click "Max" to see the proper timeline. I don't follow UK equities closely, but I think the same thing happened to a number of UK banks at the time. E.g. RBS. Unfortunately the whole thing was quite uneven. E.g. Goldman Sachs took advantage of the morons at AIG who sold them very cheap "insurance" such as credit default swaps. But Goldman was made whole. What should have happened is that Goldman should have been made to share the pain. Edit: I'm of course talking about the '08 financial crisis in general. I don't agree that the Libor scandal was significant enough to nationalize the banks as punishment. I'd much rather see a few bad actors taken out back and shot. That would be much more salutary in terms of deferring future bad behavior.
Angostura 9y ago
I think the implication is that they aren't innocent, but bear responsibility for the activity; either directly, por by setting the culture and governance arrangements.

freech 9y ago

> first, you identify inefficiencies in the market: weaknesses, loopholes, things like that Huh? That's not what inefficiency means. It means that an asset costs more (or less) then it's worth.

cm2187 9y ago

The article is light on the description of what actually happened but there is a section about the impact of his action and whether he relised the impact. One thing to understand is that there was not one but two distinct manipulations of Libor. The first is the one this article refers to, which is before the financial crisis, swap traders influencing the libor submitters to move their contribution to the fixing by a tiny amount, often a couple of basis points, to fit the massive future positions they were sitting on. Completely unethical and illegal but unlikely to have any noticable effect on the market, kind of like stealing a penny from a million bank accounts. It’s still stealing, but the impact on the market is limited. The second manipulation was of a different nature. It is at the height of the financial crisis, when banks were failing as a result of bank runs every week, libor submitters, probably under instruction / tacit consent from their management and regulators, low balled their contribution to the libor fixing to not appear to be struggling to fund themselves (by having a high cost of borrowing) since these contributions were public and investors were trying to infer what bank was next to fail. These low balling were probably in the 50-300 basis point range, ie with a material impact on the wider maket (borrowers should have paid significantly higher interest rates during that period). And this is the one whistle blowers complained to regulators about, falling into deaf ears.

osullivj 9y ago
The article is wrong in a couple of substantial matters. Firstly: "as far as I can tell, he is the only banker currently in jail for crimes committed during the financial crisis." Wrong - the Barclays Swap traders are doing time. @teamJayMerchant is in HMP Wandsworth. Secondly: "the ultimate people who drive behavior at banks are actually the shareholders." I own some banking shares and I wish I didn't. Long experience of working in the banking sector has convinced me that banks are run for the benefit of the senior management. Shareholders, like customers, are just convenient chumps to be gouged at every turn.
- viraptor 9y ago
  > I own some banking shares and I wish I didn't. I'm really curious what you mean by that. Is it just that they bring good money, or why don't you get rid of them?

LittlePeter 9y ago

What is surprising to me is that LIBOR setting was not based on actual transactions but on the assumptions what I would pay bank X to borrow money. The perceived punishment for lying was laughable too. All around this just invites actors with bad incentives. I believe as of today LIBOR is set based on actual transactions. But who was the genius who created the original LIBOR? Perhaps it all started as something hacky in the 60s and they could not foresee how important LIBOR would become?

nmstoker 9y ago
It started in the mid 80s according to Wikipedia. I don't doubt what they did was immoral, but most of the articles I've seen skip over the murky aspect of what exactly was illegal. Thinking of an absurd parallel, if you had a dinner club and had to say how much you were going to pay before the restaurant was picked, it's hard to see how manipulating your decision to influence the restaurant chosen would be illegal if there wasn't some firm agreement in the process being deterministic or formally defined. And that wouldn't change even if others were making money on the back of the restaurant choice! What I'd like to see explained is how LIBOR went from an ill-defined process to one where the way some participants set it was no longer legal. What had the participant banks signed up to do /not do which they then failed to do? Or is the illegality all on the part of those trading on it? (ie insider trading, given that it was based on non-public information)

dbuder 9y ago

If you ask a bunch of traders to give you a fake number and then cry that it's a fake number I have no sympathy.

truculation 9y ago

My bank was involved with the LIBOR scandal but they won't let my wife pay small amounts of cash into my account just in case we're up to something dodgy. If I temporarily have a large amount of cash in the account then they send me brochures trying to lure me into some premium 'exclusive' club which feels more than slightly greasy. I would switch banks but it's a lot of hassle. Plus I don't get the sense that any of them would be working for me. They're working for the regulator, or for the forces of darkness, or for someone else.

weavie 9y ago
If you are in the Uk, switching accounts is a lot easier than it used to be. https://www.currentaccountswitch.co.uk/howtoswitch/Pages/How.aspx https://www.currentaccountswitch.co.uk/howtoswitch/Pages/How...
pjmorris 9y ago
Early in 2008, on principle, we switched from a 'Too Big To Fail' bank to a credit union. It was a pain, and is occasionally inconvenient, but that pain is outweighed by the satisfaction in reading the headlines and being glad I'm not funding them anymore.

kbart 9y ago

"The mastermind of the LIBOR scandal was a guy named Tom Hayes, a mildly autistic mathematician" How convenient is to have such people around /s. Developers should learn from stories like this as well -- don't do anything illegal, even though your superiors tell you so, because when shit hits the fan, you will be the one held accountable.

AndyMcConachie 9y ago
It's unfortunately a much more convenient narrative than blaming the people that actually benefitted the most (i.e., bank CEOs). "This is part of the reason I love Hayes as a central character for this book — because he’s not your cookie-cutter banker out of central casting. This is a guy who is much happier going home after a day of work and having a bucket of fried chicken and an orange juice and watching Seinfeld reruns than he is going out to Michelin-starred restaurants or a swanky club. To me, his massive social awkwardness — the fact that he would go to a dinner party, and sit next to a stranger, and start talking to her very loudly about his dandruff problem — he had no idea how to behave in normal society." Political and cultural ostracism has real world consequences. They've found their scapegoat and they're piling on. It's pretty disgusting actually.
- kbart 9y ago
  I partly blame media for that as well, because they tend to portray movie-like evil minded geniuses that are probably more appealing and easier to grasp for general reader than methodical, faceless, industrious scams and legal gray areas. This can be seen even more so in politics.
  - jjoonathan 9y ago
    Captain America punches Campaign Finance in the face, freeing the American people from the grip of expanding monopolies and anti-consumer practices!
  - rhizome 9y ago
    The media ain't what caps on RMS in every HN thread in which he is mentioned.